Have you ever wondered why so many people who seek to refinance their home loans lament about their existing mortgage loans? It’s because many people don’t understand financial jargon and often feel duped by shrewd bankers. In singapore, refinancing housing loans can be very tedious. This is even worse for first-time homeowners who have no clue about financial jargon or what it means for their housing loans.
If you are looking to refinance mortgage loans in singapore, here is your chance to get the better side of those smart bankers.
Below are the five most commonly used terms in housing loans and their meanings.
Refinancing a Home Loan
When you pay off an existing home loan with another loan, you are refinancing your home loan. A competing bank could be more aggressive and entice you to take up their home loan products. They will buy-out your current home loan in favour of their product. Alternatively, the move could be self-prompted. You could either want to take advantage of fluctuating interest rates, shorten the loan repayment period, or utilise the equity from your home.
Fixed and Floating Interest Rates
Just as the names imply, fixed interest rates do not vary, but floating interest rates fluctuate.
For fixed rates, a bank will charge you a pre-specified rate for a specified period that does not vary with the market trends. At the expiry of the period, the bank reviews the interest rate in line with the prevailing market rates.
On the other hand, floating rates are pegged on benchmark indices such as the Singapore Interbank Offer Rate (SIBOR). The banks add to the benchmark rate which fluctuates with the market trends.
This is a period when the bank expects you to retain the facility with them. It is designed by the banks and embedded in the home loan contracts usually lasting between one and three years.
Banks often “safeguard” the lock-in periods by imposing substantial charges, penalties and fees such as valuation fees and legal fees to deter customers from refinancing home loans during this period. Banks will also drawback any subsidies and waivers if customers choose to break the contract during this period.
Loan-to-Value or LTV is the maximum amount a bank is willing to lend out for a property relative to its value. For instance, on a property worth SGD 1 million, a may offer a loan worth 80 percent of the value. The remaining amount, deposit, is paid by the customer either as cash or through their CPF.
Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio(MSR)
The TDSR is a calculation of your ability to service debts based on your debt burden as a ratio of your monthly income. TDSR has capped at 60 percent the monthly income.
The MSR is a term you will come across if you are planning to purchase a house through the public housing government schemes such as HDB. It is a calculation of the proportion of your gross monthly income spent on mortgage repayment. Your MSR cannot exceed 30%.
Both these ratios are regulated by the Monetary Authority of Singapore (MAS). Besides, if you are looking at refinancing your housing loan, MAS regulations require the bank to perform a fresh TDSR based on your current and future obligations.
To wrap up, you may not be a financial guru, but grasping these terminologies will give you an edge if you are looking to refinance your housing loan.